Oldspeak: “When your most elite, most powerful members of the society adopt a strategy of plundering, then they will develop a morality that doesn’t simply permit plundering, but valorizes it. And when that happens, the moral structures of the society will inevitably deteriorate. In the upper classes that leads to polite looting. In the under classes that leads to street looting. -William K. Black

I keep hearing comparisons between the London riots and riots in other European cities—window smashing in Athens or car bonfires in Paris. And there are parallels, to be sure: a spark set by police violence, a generation that feels forgotten.

But those events were marked by mass destruction; the looting was minor. There have, however, been other mass lootings in recent years, and perhaps we should talk about them too. There was Baghdad in the aftermath of the US invasion—a frenzy of arson and looting that emptied libraries and museums. The factories got hit too. In 2004 I visited one that used to make refrigerators. Its workers had stripped it of everything valuable, then torched it so thoroughly that the warehouse was a sculpture of buckled sheet metal.

Back then the people on cable news thought looting was highly political. They said this is what happens when a regime has no legitimacy in the eyes of the people. After watching for so long as Saddam and his sons helped themselves to whatever and whomever they wanted, many regular Iraqis felt they had earned the right to take a few things for themselves. But London isn’t Baghdad, and British Prime Minister David Cameron is hardly Saddam, so surely there is nothing to learn there.

How about a democratic example then? Argentina, circa 2001. The economy was in freefall and thousands of people living in rough neighborhoods (which had been thriving manufacturing zones before the neoliberal era) stormed foreign-owned superstores. They came out pushing shopping carts overflowing with the goods they could no longer afford—clothes, electronics, meat. The government called a “state of siege” to restore order; the people didn’t like that and overthrew the government.

Argentina’s mass looting was called El Saqueo—the sacking. That was politically significant because it was the very same word used to describe what that country’s elites had done by selling off the country’s national assets in flagrantly corrupt privatization deals, hiding their money offshore, then passing on the bill to the people with a brutal austerity package. Argentines understood that the saqueo of the shopping centers would not have happened without the bigger saqueo of the country, and that the real gangsters were the ones in charge.

But England is not Latin America, and its riots are not political, or so we keep hearing. They are just about lawless kids taking advantage of a situation to take what isn’t theirs. And British society, Cameron tells us, abhors that kind of behavior.

This is said in all seriousness. As if the massive bank bailouts never happened, followed by the defiant record bonuses. Followed by the emergency G-8 and G-20 meetings, when the leaders decided, collectively, not to do anything to punish the bankers for any of this, nor to do anything serious to prevent a similar crisis from happening again. Instead they would all go home to their respective countries and force sacrifices on the most vulnerable. They would do this by firing public sector workers, scapegoating teachers, closing libraries, upping tuitions, rolling back union contracts, creating rush privatizations of public assets and decreasing pensions—mix the cocktail for where you live. And who is on television lecturing about the need to give up these “entitlements”? The bankers and hedge-fund managers, of course.

This is the global Saqueo, a time of great taking. Fueled by a pathological sense of entitlement, this looting has all been done with the lights left on, as if there was nothing at all to hide. There are some nagging fears, however. In early July, theWall Street Journal, citing a new poll, reported that 94 percent of millionaires were afraid of “violence in the streets.” This, it turns out, was a reasonable fear.

Of course London’s riots weren’t a political protest. But the people committing nighttime robbery sure as hell know that their elites have been committing daytime robbery. Saqueos are contagious.

The Tories are right when they say the rioting is not about the cuts. But it has a great deal to do with what those cuts represent: being cut off. Locked away in a ballooning underclass with the few escape routes previously offered—a union job, a good affordable education—being rapidly sealed off. The cuts are a message. They are saying to whole sectors of society: you are stuck where you are, much like the migrants and refugees we turn away at our increasingly fortressed borders.

David Cameron’s response to the riots is to make this locking-out literal: evictions from public housing, threats to cut off communication tools and outrageous jail terms (five months to a woman for receiving a stolen pair of shorts). The message is once again being sent: disappear, and do it quietly.

At last year’s G-20 “austerity summit” in Toronto, the protests turned into riots and multiple cop cars burned. It was nothing by London 2011 standards, but it was still shocking to us Canadians. The big controversy then was that the government had spent $675 million on summit “security” (yet they still couldn’t seem to put out those fires). At the time, many of us pointed out that the pricey new arsenal that the police had acquired—water cannons, sound cannons, tear gas and rubber bullets—wasn’t just meant for the protesters in the streets. Its long-term use would be to discipline the poor, who in the new era of austerity would have dangerously little to lose.

This is what David Cameron got wrong: you can’t cut police budgets at the same time as you cut everything else. Because when you rob people of what little they have, in order to protect the interests of those who have more than anyone deserves, you should expect resistance—whether organized protests or spontaneous looting.

And that’s not politics. It’s physics.

Naomi Klein is an award-winning journalist and syndicated columnist and the author of the international and New York Times bestseller The Shock Doctrine: The Rise of Disaster Capitalism (September 2007); an earlier international best-seller, No Logo: Taking Aim at the Brand Bullies; and the collection Fences and Windows: Dispatches from the Front Lines of the Globalization Debate (2002). Read more at Naomiklein.org. You can follow her on Twitter @naomiaklein.

Oldspeak: “Martin Luther King was a Champion of poor, disenfranchised, marginalized people. He was anti-militaristic, anti-capitalist, anti-corporatist, anti-poverty, pro-life, pro-love, pro-union, for inclusion, freedom and equality. Today In Obama’s america, young people, poor people, people of color, and the unemployed are being ignored. The U.S. is waging 4 wars. Income inequality is at depression era levels. Workers rights are being usurped. Access to education is being eroded. The food supply is facing existential threats from GMOs and rampant financial speculation. Public spending and services are being cut. More and more public entities and institutions are being commodified and privatized. Meanwhile Obama’s benefactors in Banking, and other sectors of the Oligarchy are doing better than ever. Brother Martin has to be rolling in his grave at seeing his legacy forsaken and trampled upon by one of his own…”

Before he went over that mountain top in that week in April like this one back in l968, Martin Luther King Jr. said he had already seen the other side as he spent his last days on earth fighting for the garbage men of Memphis, while speaking out about the twin evils of war and poverty.

A few days earlier, a great, black American essayist and historian, Manning Marable, died suddenly just before his new and definitive book on Malcolm X came out showing how America’s best-known Muslim martyr had moved from a focus on the domestic politics of racial confrontation to the international politics of global revolution.

(Among his findings: The US government spied on Malcolm as he globe-trotted, linking up with like-minded activists. This was offered up as a new revelation. I had to smile since I did an investigative report for Ramparts Magazine in 1967 on how the CIA was trying to discredit him in Africa.)

We live in a world of constantly redrawn battle lines where new generations displace the old ones and some of yesterday’s leaders move to higher levels of consciousness, while many others, like Libya’s human rights abusing leader Qaddafi along with some civil rights leaders, years ago, secretly joined Washington’s crusade against Malcolm.

Washington is now crusading against Libya. The war there was first declared a humanitarian intervention before it turned into a military intervention in a civil war, and is on its way to becoming a stalemate. Already NATO has bombed the rebels in one of those mistakes all too common in Afghanistan and Pakistan.

The US has apparently decided it no longer wants to throw good money after bad – perhaps because it has finally dawned on the White House that we are running out of money. So, we are declaring victory and moving on.

Even imperial projects have to be tempered as our wars abroad turn into follies and our economic turnaround at home is also not what it has been advertised to be.

As the AFL CIO noted while the administration was celebrating a downtick in unemployment:

“While the official unemployment rate is 8.8 percent, it’s 15.7 percent if unemployed, underemployed and those who have given up looking for work are included – more than 24 million people …

“Young people and people of color continue to experience the worst jobless rates which have remained high, with 24.5 percent of teenagers out of work and 15.5 percent of black workers and 11.3 percent of Hispanics jobless. Some 7.9 percent of white workers are jobless, as are 7.1 percent of Asian workers.”

At the same time, better-paid government jobs are being chopped, leaving workers in lower wage, private sector jobs that pay less money for more work. Many of those workers say their salaries don’t cover their expenses. Foreclosures are up even as bank profits (and CEO salaries) soar.

We are just learning the full extent of the Federal Reserve Banks loans to banks the world over, while a promised crackdown on fraud has yet to come. A bailout costing trillions was kept secret until a reporter’s lawsuit just forced a disclosure.

Still hidden is the role government plays in manipulating markets or pumping them up through the Plunge Protection Team, a shadowy agency I discuss in more detail in my book, “The Crime of Our Time” (Disinfo Books).

Wall Street’s “swinging dicks,” as they are called, are back in the saddle. They have neutered financial reform and seem to have silenced the president, who seems to want o cheer up the people rather than inform them about what’s really going on as food and gas prices rise while inflation begins to rear its ugly head.

Veteran investor Jim Rogers told the Daily Bell: “It’s already happening; prices are going higher. Now the blame game starts and the government will blame it on draught or crop failure or whatever. Politicians will do and say anything to avoid explaining that inflation is a monetary problem. Their reactions are always the same and it’s always astonishing to me. As President Ford said, “there is no problem” – and even if there is, it’s not his problem. Well, there are always people who are in denial; then, the problem gets worse not better.

Wall Street’s hedge funds are having a field day. The New York Times reports that wealth among executives in that part of the financial labyrinth is so concentrated that 25 hedge fund managers “pocketed a total of $22.07 billion … At $50,000 a year, it would take the salaries of 441,000 Americans to match the sum.”

Who is speaking out against this? Not the Republicans, for sure. Not many Democrats either. Not even the president or his “more wealth for the wealthy” booster Treasury chief Tim Geithner.

Wall Street is stronger than ever. Its “reforms” are proving to be a joke. No big executives who profited from pervasive mortgage fraud have gone to jail as prosecutions dwindle.

There has been a respite in Wisconsin as a state judge shoots down the GOP’s attempt to outlaw collective bargaining, but similar laws have passed in Ohio and New Hampshire.

In a globalized world, we are all interdependent. What happens to one part of this web affects us all. That’s why we have to pay attention to the falling economic dominoes in Europe, where Portugal may be next to go with Spain and Ireland not far behind. So far, protests by hundreds of thousands in Britain have not dented, much less changed, the government’s cutbacks in the name of austerity.

Serious critics may have the facts on their side, but are still being marginalized. They are considered ranters, not reasonable. Journalist Chris Hedges was honored when he wrote for the New York Times. When he left, and was finally able to speak his own mind, he began challenging the false promises of globalization

He writes, “The refusal by all of our liberal institutions, including the press, universities, labor and the Democratic Party, to challenge the utopian assumptions that the marketplace should determine human behavior permits corporations and investment firms to continue their assault, including speculating on commodities to drive up food prices. It permits coal, oil and natural gas corporations to stymie alternative energy and emit deadly levels of greenhouse gases. It permits agribusinesses to divert corn and soybeans to ethanol production and crush systems of local, sustainable agriculture.

“It permits the war industry to drain half of all state expenditures, generate trillions in deficits and profit from conflicts in the Middle East we have no chance of winning. It permits corporations to evade the most basic controls and regulations to cement into place a global neo-feudalism. The last people who should be in charge of our food supply or our social and political life, not to mention the welfare of sick children, are corporate capitalists and Wall Street speculators.”

So, once again, a gauntlet has been thrown down, but so far activists, advocates, unions and even progressive journalists stay submerged in fighting partisan wars and are not taking on the deeper fight for economic justice.

If we want to walk in the footsteps of Dr. King, we need to broaden our understanding of the scale of what needs changing and target the banksters on Wall Street as well as Republican politicians that do their biding.

Oldspeak:” Need food stamps? JP Morgan Chase profits. Have bad credit and need a credit card to eat or pay rent? First Premier Bank profits. Can’t afford to pay back taxes? Bank of America profits. Living paycheck to paycheck and need a short-term loan to get by? Pay Day Loansharks profit. Need a Degree to get that job that 100’s of others are applying for? Diploma Mills like University of Phoenix profit. Disaster Capitalists are making big money off Average Joes in these uncertain times. Finding all kinds of new and inventive ways to squeeze every last penny out of an ever shrinking middle and working class. Profit is Paramount.”

From Joshua Holland @ Alter Net:

The ruins of the American economy represent a massive crime scene. Wall Street built a house of cards on fraud and misrepresentation, it crashed, and Americans’ aggregate net worth is now more than $12 trillion off of its peak. Unemployment remains sky-high and the prospects for a robust recovery anytime soon are dim.

But as Naomi Klein artfully laid out in her book, The Shock Doctrine, a catastrophe for you and I usually presents an opportunity for the Titans of capital. And the grievous economic crisis affecting so many American families is no exception — big business has found a number of ways to profit, directly, from Main Street’s economic pain. Like vultures descending on a rotting corpse, they’ve come up with a variety of innovative methods to pull the last scraps of meat off the bones of America’s middle-class.

Here are five ways these scavengers are making coin from our economic devastation.

When Americans Go Hungry, JPMorgan Profits

It’s been widely reported that 43 million Americans now require help meeting their basic nutritional needs. Less well known is that JPMorgan is the largest servicer of food-stamps in the U.S., offering benefit cards in 26 states. As Mary Bottari wrote for AlterNet, “The firm is paid per customer. This means that when the number of food stamp recipients goes up, so do JPMorgan profits.”

Perhaps that doesn’t get your blood boiling. If not, Bottari adds: “JPMorgan is taking its responsibility to keep the U.S. unemployment rate high by offshoring the servicing of many of these contracts to India, according to ABC News.” Yes, they’re profiting off of our pain, and offshoring the work required to do so.

When First Premier Bank first offered a credit card with a top interest rate of 79.9 percent, it evoked outrage. So they lowered it…to 59.9 percent. And, as Michael Snyder at the Economic Collapse noted, “Not only are the interest rates on those cards super high, but they also charge a whole bunch of fees on those cards as well.”

They include:

$45 processing fee to open the account

annual fee of $30 for the first year

$45 fee for every subsequent year

monthly service fee of $6.25

Some argue that anyone who would sign onto a deal like that must be “stupid.” But these are cards pitched to those with bad credit – an ever larger group thanks to the recession. It’s easy to scoff at such rubes until one realizes that the lion’s share of these “stupid” people have no choice but to take on even very costly debt if they want to eat or pay the rent. 6.2 million Americans have been out of a job for 27 or more weeks; 3.9 million saw their benefits run out entirely last year.

CNN reported that 700,000 people have signed up for the card, and between 200,000 and 300,000 new applications are coming in each month. That’s a lot of bread for First Premier.

Dunning the Desperate for Fun and Profit

One sector in this moribund economy is doing quite well: collection agencies. But they’re not your father’s collection agencies –the business is different today.

Across the country, savvy investors are buying up the debts of those who have run into difficulties for just pennies on the dollar. They then turn the screws on borrowers in order to get a return on their investments. As the Sarasota Post-Star reported, “Debt collectors often use threats and insults to intimidate consumers. But in recent years, collection has become more aggressive, more litigious and more prone to fraud.”

Creditors will call neighbors and family members in search of the consumer, and reveal information about their debt. They will contact the consumer’s place of employment and threaten to get them fired with repetitive calls. They will say harsh and insulting things to force the person to pay.

“Around 9/11, a debt collector said to my client, ‘After all those people died in the towers, you won’t pay your bills,'” said [attorney Ron] Kim. “It was an absurd statement, as if the two were connected, but she was so upset and ultimately ended up filing for bankruptcy.”

They’ve increasingly resorted to filing lawsuits, which are often settled by borrowers who don’t have good legal representation, even when the lender’s claims are suspect. According to research by the Legal Aid Society, debt buyers filed over 450,000 lawsuits in New York City alone between January 2006 and July 2008, over 90 percent of which ended in judgments against consumers who “likely weren’t aware they were being sued and only 1% of whom were represented by an attorney.”

According to Moe Bedard of LoanWorkout, a newsletter about the loan modification industry, the now familiar robo-signing scam is popping up in the market for consumer debt as well as home-loans.

According to the Consumers Union, the nonprofit publisher of Consumer Reports magazine, collectors are increasingly taking disputes to court without proof that they own the debt in question, or even that the debt is valid.

Consumers Union points to automated software used to file lawsuits by the thousands and the proliferation of “robo-signers” who falsely claim to review and verify debtors’ records before taking legal action.

For a while after the crash, Americans had unloaded debt, but with wages stagnating and unemployment remaining above 9 percent for 21 straight months, the trend has reversed and they’re again taking on mountains of debt to stay afloat. All of this means that while the recession takes its toll on the American middle class, the shaky debt industry is booming.

Pay-Day!

So-called pay-day loans are sold as short-term, stop-gap measures for people living paycheck to paycheck, but their interest rates often start at an annual rate of 600 percent – and some go much higher than that.

This recession has been great for the industry. Congress has tried several times to put a cap on their usury, but as the Huffington Post reported last year during the financial reform debate, “The influential $42 billion-a-year payday lending industry, thriving from a surge in emergency loans to people struggling through the recession, is pouring record sums into lobbying, campaign contributions, and public relations.”

It worked, they killed off any meaningful limits on the vig they can charge and business is booming.

A similar ripoff for the working (or the not-working) poor are those rent-to-own schemes that allow people to pick up a couch with no money down, only to end up paying far, far more than they would have otherwise paid. According to ABC News, “The rent-to-own industry has a history few retailers would envy but recent sales most would covet.” And contrary to popular belief, people rarely rent these items in order to own them at the end of the day; industry officials told ABC that “just 5% of their customers end up buying their products; customers are simply looking for short-term solutions when critical appliances go kaput.”

Can’t Afford to Pay Back Taxes? There’s a Ripoff That’s Right for You!

A lot of folks are struggling with all sorts of costs, and some can’t afford to pay the property taxes on their homes. The Huffington Post Investigative Fund dug into the problem, and found that Bank of America and a hedge fund called the Fortress Investment Group had “spotted a fresh money-making opportunity — collecting the tax debts of tens of thousands of people.” What do they do with it? Well, the banksters add interest charges and fees, and then they bundle the debts into securities and sell them off to investors. (Sound familiar?)

In late May and early June, proxies for the two institutions quietly bought hundreds of millions of dollars in homeowners’ property tax debts in Florida by bidding at a series of online auctions held by county tax collectors. They didn’t use their names but donned multiple other identities, dominating the auctions and repeatedly bidding on the same parcels — in the case of Walker’s small home, more than 8,000 times.

Then, in September, Bank of America’s securities division packaged $301 million worth of the tax liens it and Fortress had acquired into bonds pitched privately to major investors. The anticipated return — estimated at between 7 to 10 percent — is possible because buyers of tax debts can assess a panoply of interest charges and other fees. When the debt goes unpaid long enough, the liens buyer can seize properties through foreclosure.

That’s Just Big Finance

All of these scams probably add up to a fraction of what the financial industry has gained from the Treasury’s bailouts and the free money the Fed has showered on them.

But it’s not just Wall Street that’s profiting from the wreckage of our once-mighty economy. Good old fashioned wage theft is on the rise. With all sorts of subsidized programs to retrain workers – and with Americans feeling, rightly, that they need as much education as possible — fly-by-night diploma mills are proliferating. Walmart, which had seen its profits languishing, isnow making a killing on the cheap goods it imports from its overseas sweatshops.

It’s the essence of the Shock Doctrine: never let a crisis pass without exploiting the potential to profit.

Oldspeak: “ President Barack Obama understands the basic problem, but he also knows that he won’t be reelected without Wall Street’s help. That’s why he promised to further reduce “burdensome” regulations in the Wall Street Journal just two weeks ago. His op-ed was intended to preempt the release of the Financial Crisis Inquiry Commission’s (FCIC) report, which was expected to make recommendations for strengthening existing regulations. Obama torpedoed that effort by coming down on the side of big finance. Now, it’s only a matter of time before another crash.” -Mike Whitney

From Mike Whitney @ Counter Punch:

Readers, while this seems all very prescient, it is still limited. Actually the carry trade originating in Japan ended in July 2007, ergo ipso facto presto, the wind disappeared from the carry trade speculation ponzi game. The Japanese carry trade was essentially privatized fiat “money” more or less leveraged from the savings of Japanese citizens unless you factor the infintesimal reserve requirements for the issuance of those digital entries which were run through the numerous UK associated pirate banking coves and archepelagos. Capeiche, Y’all? That retraction of the Japanese carry trade was precipitated by China acting to change that dynamic with their substantial foreign exchange reserves. It started using the Yen as one of its foreign reserve currencies, which drove the value of the Yen upward, suddenly strong not “weak”. The lack of regulation of banking and speculation on a global basis becomes the key problem. The French banking implosion may have been the first large meltdown. To paraphrase George Soros, I believe, when the tide goes out you can suddenly see who have lost their bathing suits. The US Federal Reserve imitation of the carry trade, wrapped in the econo gibberish of “quantitative easing” is effectively a rebooting of the Japanese carry trade. Same BS, different source. The QE nonsense will implode in an equal or greater implosion without a doubt. Understand also that harboring this hyperinflationary “money” within the shadow banking dys-system, is what is now fueling commodities speculation, and so the fictions continue to reinflate the global Ponzi. Tadit Anderson

On August 9, 2007, an incident took place at a bank in France that touched-off a financial crisis that that would eventually wipe out more than $30 trillion in capital and thrust the world into the deepest slump since the Great Depression. The event was recounted in a speech by Pimco’s managing director Paul McCulley, at the 19th Annual Hyman Minsky Conference on the State of the U.S. and World Economies. Here’s an excerpt from McCulley’s speech:

“If you have to pick a day for the Minsky Moment, it was August 9. And, actually, it didn’t happen here in the United States. It happened in France, when Paribas Bank (BNP) said that it could not value the toxic mortgage assets in three of its off-balance sheet vehicles, and that, therefore, the liability holders, who thought they could get out at any time, were frozen. I remember the day like my son’s birthday. And that happens every year. Because the unraveling started on that day. In fact, it was later that month that I actually coined the term “Shadow Banking System” at the Fed’s annual symposium in Jackson Hole.

“It was only my second year there. And I was in awe, and mainly listened for most of the three days. At the end….I stood up and (paraphrasing) said, ‘What’s going on is really simple. We’re having a run on the Shadow Banking System and the only question is how intensely it will self-feed as its assets and liabilities are put back onto the balance sheet of the conventional banking system.’”

BNP had been involved in credit intermediation, that is, it was exchanging bonds made up of mortgage-backed securities (MBS) for short-term loans in the repo market. It all sounds very complex, but it’s no different than what banks do when they take deposits from customers and then invest the money in long-term assets. (aka–“maturity transformation”) The only difference here was that these activities were not regulated, so no government agency was involved in determining the quality of the loans or making sure that the various financial institutions were sufficiently capitalized to cover potential losses. This lack of regulation turned out to have dire consequences for the global economy.

It took nearly a year from the time that subprime mortgages began to default en masse, until the secondary market (where these “toxic” bonds were traded) went into a nosedive. The problem was simple: No one knew whether the underlying mortgages were any good or not, so it became impossible to price the assets (MBS). This created, what Yale Professor Gary Gorton calls, the e coli problem. In other words, if even a small amount of meat is contaminated, millions of pounds of hamburger has to be recalled. That same rule applies to mortgage-backed securities. No one knew which MBS contained the bad loans, so the entire market froze and trillions of dollars in collateral began to fall in value.

Subprime was the spark that lit the fuse, but subprime wasn’t big enough to bring down the whole financial system. That would take bigger ructions in the shadow banking system. Here’s an excerpt from an article by Nomi Prins which explains how much money was involved:

“Between 2002 and early 2008, roughly $1.4 trillion worth of sub-prime loans were originated by now-fallen lenders like New Century Financial. If such loans were our only problem, the theoretical solution would have involved the government subsidizing these mortgages for the maximum cost of $1.4 trillion. However, according to Thomson Reuters, nearly $14 trillion worth of complex-securitized products were created, predominantly on top of them, precisely because leveraged funds abetted every step of their production and dispersion. Thus, at the height of federal payouts in July 2009, the government had put up $17.5 trillion to support Wall Street’s pyramid Ponzi system, not $1.4 trillion.” (“Shadow Banking”, Nomi Prins, The American Prospect)

Shadow banking emerged so that large cash-heavy financial institutions would have a place to park their money short-term and get the best possible return. For example, let’s say Intel is sitting on $25 billion in cash. It can deposit the money with a financial intermediary, such as Morgan Stanley, in exchange for collateral (aka MBS or ABS), and earn a decent return on its money. But if a problem arises and the quality of the collateral is called into question, then the banks (Morgan Stanley, in this case) are forced to take bigger and bigger haircuts which can send the system into a nosedive. That’s what happened in the summer of 2007. Investors discovered that many of the subprimes were based on fraud, so billions of dollars were quickly withdrawn from money markets and commercial paper, and the Fed had to step in to keep the system from collapsing.

Regulations are put in place to see that the system runs smoothly and to protect the public from fraud. But banking without rules is more profitable, so industry leaders and lobbyists have tried to block the efforts at reform. And, they have largely succeeded. Dodd-Frank – the financial reform act — is riddled with loopholes and doesn’t really resolve the central issues of loan quality, additional capital, or risk retention. Banks are still free to issue bogus mortgages to unemployed applicants with bad credit, just as they were before the meltdown. And, they can still produce securitized debt instruments without retaining even a meager 5 per cent of the loan’s value. (This issue is still being contested) Also, government agencies cannot force financial institutions to increase their capital even though a slight downturn in the market could wipe them out and cause severe damage to the rest of the system. Wall Street has prevailed on all counts and now the window for re-regulating the system has passed.

President Barack Obama understands the basic problem, but he also knows that he won’t be reelected without Wall Street’s help. That’s why he promised to further reduce “burdensome” regulations in the Wall Street Journal just two weeks ago. His op-ed was intended to preempt the release of the Financial Crisis Inquiry Commission’s (FCIC) report, which was expected to make recommendations for strengthening existing regulations. Obama torpedoed that effort by coming down on the side of big finance. Now, it’s only a matter of time before another crash.

Here’s an excerpt from a special report on shadow banking by the Federal Reserve Bank of New York:

“At the eve of the financial crisis, the volume of credit intermediated by the shadow banking system was close to $20 trillion, or nearly twice as large as the volume of credit intermediated by the traditional banking system at roughly $11 trillion. Today, the comparable figures are $16 and $13 trillion, respectively…..The weak-link nature of wholesale funding providers is not surprising when little capital is held against their asset portfolios and investors have zero tolerance for credit losses.” (“Shadow Banking”, Federal Reserve Bank of New York Staff Report)

So, between $4 to $7 trillion vanished in a flash after Lehman Brothers blew up. How many millions of jobs were lost because of inadequate regulation? How much was trimmed from output, productivity, and GDP? How many people are on now food stamps or living in homeless shelters or struggling through foreclosure because unregulated financial institutions were allowed to carry out credit intermediation without government supervision or oversight?

Ironically, the New York Fed doesn’t even try to deny the source of the problem; deregulation. Here’s what they say in the report: “Regulatory arbitrage was the root motivation for many shadow banks to exist.”

What does that mean? It means that Wall Street knows that it’s easier to make money by eliminating the rules….the very rules that protect the public from the predation of avaricious speculators.

The only way to fix the system is to regulate all financial institutions that act like banks. No exceptions.

Oldspeak: ““What for a poor man is a crust, for a rich man is a securitized asset class.” -Futures trader Ann Berg, quoted in The Guardian UK. Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices and unemployment.” “

From Helen Hodgson Brown @ Truthout:

The Associated Press reports that roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day. Analysts estimate that food price inflation in Egypt is currently at an unsustainable 17 percent yearly. In poorer countries, as much as 60 to 80 percent of people’s incomes go for food, compared to just 10 to 20 percent in industrial countries. An increase of a dollar or so in the cost of a gallon of milk or a loaf of bread for Americans can mean starvation for people in Egypt and other poor countries.

Follow the Money

The cause of the recent jump in global food prices remains a matter of debate. Some analysts blame the Federal Reserve’s “quantitative easing” program (increasing the money supply with credit created with accounting entries), which they warn is sparking hyperinflation. Too much money chasing too few goods is the classic explanation for rising prices.

The problem with that theory is that the global money supply has actually shrunk since 2006, when food prices began their dramatic rise. Virtually all money today is created on the books of banks as “credit” or “debt,” and overall lending has shrunk. This has occurred in an accelerating process ofdeleveraging (paying down or writing off loans and not making new ones), as the subprime housing market has collapsed and bank capital requirements have been raised. Although it seems counterintuitive, the more debt there is, the more money there is in the system. As debt shrinks, the money supply shrinks in tandem.

That is why government debt today is not actually the bugaboo it is being made out to be by the deficit terrorists. The flipside of debt is credit, and businesses run on it. When credit collapses, trade collapses. When private debt shrinks, public debt must therefore step in to replace it. The “good” credit or debt is the kind used for building infrastructure and other productive capacity, increasing the Gross Domestic Product (GDP) and wages; and this is the kind governments are in a position to employ. The parasitic forms of credit or debt are the gamblers’ money-making-money schemes, which add nothing to GDP.

Prices have been driven up by too much money chasing too few goods, but the money is chasing only certain selected goods. Food and fuel prices are up, but housing prices are down. The net result is that overall price inflation remains low.

While quantitative easing may not be the culprit, Fed action has driven the rush into commodities. In response to the banking crisis of 2008, the Federal Reserve dropped the Fed funds rate (the rate at which banks borrow from each other) nearly to zero. This has allowed banks and their customers to borrow in the US at very low rates and invest abroad for higher returns, creating a dollar “carry trade.”

Meanwhile, interest rates on federal securities were also driven to very low levels, leaving investors without that safe, stable option for funding their retirements. “Hot money” – investment seeking higher returns – fled from the collapsed housing market into anything but the dollar, which generally meant fleeing into commodities.

New Meaning to the Old Adage “Don’t Play With Your Food”

At one time food was considered a poor speculative investment, because it was too perishable to be stored until market conditions were right for resale. But that changed with the development of ETFs (exchange-traded funds) and other financial innovations.

As first devised, speculation in food futures was fairly innocuous, since when the contract expired, somebody actually had to buy the product at the “spot” or cash price. This forced the fanciful futures price and the more realistic spot price into alignment. But that changed in 1991. In a revealing July 2010 report in Harper’s Magazine titled “The Food Bubble: How Wall Street Starved Millions and Got Away with It,” Frederick Kaufman wrote:

The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment….

Robber barons, gold bugs, and financiers of every stripe had long dreamed of controlling all of something everybody needed or desired, then holding back the supply as demand drove up prices.

As Kaufman explained this financial innovation in a July 16 interview on Democracy Now:

Goldman … came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves…. Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called “going long.” They started going long on wheat futures…. And every time one of these contracts came due, they would do something called “rolling it over” into the next contract…. And they kept on buying and buying and buying and buying and accumulating this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a “demand shock.” Usually prices go up because supply is low…. In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up…. [H]ard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel…. [T]he irony here is that in 2008, it was the greatest wheat-producing year in world history.

… [T]he other outrage … is that at the time that Goldman and these other banks are completely messing up the structure of this market, they’ve protected themselves outside the market, through this really almost diabolical idea called “replication”…. Let’s say, … you want me to invest for you in the wheat market. You give me a hundred bucks…. [W]hat I should be doing is putting a hundred bucks in the wheat markets. But I don’t have to do that. All I have to do is put $5 in…. And with that $5, I can hold your hundred-dollar position. Well, now I’ve got ninety-five of your dollars…. [W]hat Goldman did with hundreds of billions of dollars, and what all these banks did with hundreds of billions of dollars, is they put them in the most conservative investments conceivable. They put it in T-bills…. [N]ow that you have hundreds of billions of dollars in T-bills, you can leverage that into trillions of dollars…. And then they take that trillion dollars, they give it to their day traders, and they say, “Go at it, guys. Do whatever is most lucrative today.” And so, as billions of people starve, they use that money to make billions of dollars for themselves.

Other researchers have concurred in this explanation of the food crisis. In a July 2010 article called “How Goldman Sachs Gambled on Starving the World’s Poor – And Won,” journalist Johann Hari observed:

Beginning in late 2006, world food prices began rising. A year later, wheat price had gone up 80 percent, maize by 90 percent and rice by 320 percent. Food riots broke out in more than 30 countries, and 200 million people faced malnutrition and starvation. Suddenly, in the spring of 2008, food prices fell to previous levels, as if by magic. Jean Ziegler, the UN Special Rapporteur on the Right to Food, has called this “a silent mass murder,” entirely due to “man-made actions.”

Some economists said the hikes were caused by increased demand by Chinese and Indian middle-class population booms and the growing use of corn for ethanol. But according to Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi, demand from those countries actually fell by 3 percent over the period; and the International Grain Council stated that global production of wheat had increased during the price spike.

According to a study by the now-defunct Lehman Brothers, index fund speculation jumped from $13 billion to $260 billion from 2003 to 2008. Not surprisingly, food prices rose in tandem, beginning in 2003. Hedge fund manager Michael Masters estimated that on the regulated exchanges in the US, 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely in anticipation of price inflation and resale. George Soros said it was “just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices.”

An August 2009 paper by Jayati Ghosh, professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in New Delhi, compared food staples traded on futures markets with staples that were not. She found that the price of food staples not traded on futures markets, such as millet, cassava and potatoes, rose only a fraction as much as staples subject to speculation, such as wheat.

Nomi Prins, writing in Mother Jones in 2008, also blamed the price hikes on speculation. She observed that agricultural futures and energy futures were being packaged and sold just like CDOs (collateralized debt obligations), but in this case they were called CCOs (collateralized commodity obligations). The higher the price of food, the more CCO investors profited. She warned:

[W]ithout strong regulation of electronic exchanges and the derivatives products that enable speculators to move huge proportions of the futures markets underlying commodities, putting a bit of regulation into the London-based exchanges will not alleviate anything. Unless that’s addressed, this bubble is going to take more than homes with it. It’s going to take lives.

What Can Be Done?

According to Kaufman, the food bubble has now increased the ranks of the world’s hungry by 250 million. On July 21, 2010, President Obama signed a Wall Street reform bill that would close many of the regulatory loopholes allowing big financial institutions to play in agriculture commodity futures markets, but Kaufman says the bill’s solutions are not likely to work. Wall Street innovators can devise new ways to speculate that easily dance around cumbersome, slow-to-pass legislation. Attempts to ban all food speculation are also unlikely to work, he says, since firms can pick up the phone and do their trades through London, or arrange over-the-counter (private) swaps.

As an alternative, Kaufman suggests a worldwide or national grain reserve, so that regulators can bring wheat into the market when needed to stabilize prices. He notes that we actually kept a large grain reserve in the Clinton era, before the mania for deregulation. President Franklin Roosevelt pledged to maintain a large grain reserve in his second Agricultural Adjustment Act in 1938.

Chris Cook, former director of a global energy exchange, maintains:

The only long term solution is to completely re-architect markets. Firstly, cutting out middlemen – which is a process already under way. Secondly, a new settlement between producer and consumer nations – a Bretton Woods II.

Speculative markets today are driven more by fear, says Cook, than by greed. Investors are looking for something safe that will give them an adequate return, which means something they can live on in retirement. They need these investments because their employers and the government do not provide an adequate safety net.

At one time, federal securities were a safe and adequate investment for retirees. Then federal interest rates plunged, and investors moved into municipal bonds. Now that market, too, is collapsing, due to threats of bankruptcy among bond issuers. Cities, counties and states floundering from the credit crisis have been denied access to the quantitative easing tools used to bail out the banks – although it was the banks, not local governments, that caused the crisis. See “The Fed Has Spoken: No Bailout for Main Street.”

Meanwhile, pensions are being slashed and Social Security is under attack. Arguably, along with the grain reserves institutionalized under Franklin Roosevelt, we need an Economic Bill of Rights of the sort he envisioned, one that would guarantee citizens at least a bare minimum standard of living. This could be done through job guarantees when people were able to work and Social Security when they were not. The program could be funded with government-created credit or government-bank-created credit, and this could be done without causing hyperinflation. To support that contention would take more space than is left here, but the subject has been tackled in my book “Web of Debt.” In the meantime, the credit needed to get local economies up and running again can be furnished through publicly-owned banks. For more on that possibility, see http://PublicBankingInstitute.org.

Oldspeak:“To once again bail out the bankers, this time by changing real estate law in a way that hasn’t been done since the 1670s, would be a far bigger deal than even the trillions in bailout dollars the TARP and Fed gave these banks in 2008/9. But the bankers and their allies…will try to present this as a simple fix to some minor paperwork problems….But they have made a Texas-sized mess of the entire mortgage title system in their haste to make money, and it is time to pay the piper.”

From Mike Lux @ Open Left:

Everything I am reading these days on financial issues points to some serious reckoning soon to come, especially because of — as the folks at Third Way are calling it — foreclosure-gate. The Massachusetts Supreme Court ruling in the Ibanez case, along with a growing body of cases where the banks and/or their servicers have been ruled against in foreclosure cases, and even the banks’ lawyers are being castigated in court by judges for bringing in made-up paperwork, is causing a growing sense of panic among the biggest banks that hold the most mortgages. Spokespeople for the banks are talking bravely, trying to dismiss the situation as some minor paperwork errors, but everyone who has been paying attention to the situation fears that there are really big consequences afoot.

The plain fact is that over the last decade, in their overwhelming rush to make bigger and bigger profits from trading in the bubble-driven real estate securities market, the banks ran roughshod over the home mortgage and title system that had served this country (and England and many others) quite well for hundreds of years — and they made a serious mess of it. Because of the way these mortgages have been sliced and diced and sold into complicated securities, homeowners, judges, and the banks themselves are having quite a bit of trouble figuring out who actually owns the note in more cases than is easy to believe. The “paperwork” — figuring out who owns the note – is not just a little messed up, it is a disaster area.

This wouldn’t be as big a deal except that the combination of the housing bubble itself plus the worst recession since the Great Depression (caused in great part by that bubble) has created a foreclosure crisis of gargantuan proportions. Millions of homeowners are in foreclosure proceedings, millions more underwater because of the collapse of housing prices. And because the banks have cooked their books, not wanting all these toxic assets to wreak havoc with their official valuation and their stock prices, they have no interest in helping homeowners stay in their homes by writing down these mortgages to current market levels. So banks are moving to foreclose these millions of homes, but they can’t prove to judges that they even own the notes that would allow them to foreclose. Thus you have robo-signers, falsified affidavits, and all kinds of strange things being presented to judges in courts. The judges who are not bought and paid for by the banks are raising big red flags about all this, and thus you have cases like Ibanez going against the banks.

This is a mess not just for the housing market but for the entire economy, as the numbers on all this are staggering, and the housing market really does have the potential to just completely freeze up, which would be an economic nightmare. Our economy has no chance of getting dramatically better until the housing market starts moving again. So the banks are now going to their political allies, just like they did in 2008, and telling them: unless you save us from the mess that we’ve created (oh, wait, they don’t use those last four words, instead it’s the unforeseeable “perfect storm”, “black swan” thing), we will go under and take the entire economy down with us. The good news for the banks is they are not necessarily looking for a cash handout this time – although it may come to that – but just some legal “tweaking” of this “minor paperwork problem.”

If you have the stomach for it and want to learn more about the gory details about the policy side of all this, there are a bunch of good writers you can turn to, including Yves Smith, David Dayen, and Marcy Wheeler, all of whom have put up great pieces worth looking at in the last couple of days.Numerian has a great post I have already linked to a couple times in past pieces this week on the truly scary implications of what is going down.

But my focus, as usual, is on the politics of all this, because the drumbeat is beginning in a big way to bail out the bankers from their own mess once again. Third Way’s piece, which Yves, David, and Marcy do a good job deconstructing, is the opening shot in what will be a very focused legislative push to once again bail out the bankers from their own mess. The banks and their allies will try to do this as quickly and quietly as they can, portraying it as a simple legal fix for minor paperwork problems. However, the consequences of this kind of legal bailout are actually far greater in some ways than the TARP bailout, as costly as that was. The TARP bailout was just dollars though. This one, as Yves writes, undermines fundamental property law that our entire economic system is based on:

This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that “dirt law” is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.
This sort of protection is fundamental to the operation of capitalism, so it’s astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm. Parliament enacted the 1677 Statute of Fraudsto establish higher standards for contracts, such as witnessing by a third party, to stop the widespread theft of property that was underway.

The memo completely ignores the harm to investors from the bank mistakes and lacks any provisions for damage to investors to be remedied. Moreover, denying borrower rights removes their leverage to obtain deep principal mortgage modifications, which for viable borrowers produces lower losses than costly foreclosures and sales of distressed property. Thus this shredding of contractual protections in mortgages not only hurts borrowers but also harms investors.

So to save the banks from their own, colossal abuses of contracts that they devised, the Third Way document advocates Congressional intervention into well established, well functioning state law. This is a case where these matters can and should be left to the courts and ultimately state AGs to coordinate the template of a more broadbased solution.

To once again bail out the bankers, this time by changing real estate law in a way that hasn’t been done since the 1670s, would be a far bigger deal than even the trillions in bailout dollars the TARP and Fed gave these banks in 2008/9. But the bankers and their allies like Third Way will try to present this as a simple fix to some minor paperwork problems. Look, if these paperwork problems were so minor, we wouldn’t need the fix they are proposing: the banks would get nicked a little in a few cases where they screwed up a little bit of paperwork, and everyone would go on their way. But they have made a Texas-sized mess of the entire mortgage title system in their haste to make money, and it is time to pay the piper.

What’s the solution? We should start with a foreclosure freeze while the government sorts through the mess and the state attorney generals finish their negotiations with the big banks. Clearly, a massive amount of mortgage write-downs to underwater homeowners to reflect current housing prices makes a ton of sense, and would dramatically cut the need for foreclosures, taking some of the pressure off the system. Once those two steps are taken, hopefully the AGs can cut a good deal for the American people to make things work better going forward.

The problem with sensible pro-middle class solutions like this is the incredible political power of these big banks. Here’s the deal, though: politicians hate the idea of having to bail these guys out again. If progressives can make clear that any legal changes the bankers are trying to push through on mortgage and title law are just one more big bailout of the big banks, we can win this fight. Let’s hope we do, because the stakes are pretty damn high.

Oldspeak:” Hmmm…I wonder how many people have been fraudulently ousted from their homes by the International Banking Cartel…Last week Florida resident Nancy Jacobini revealed that an agent hired by her bank broke into her home after she fell behind on her mortgage payments. Thinking she was being burglarized, Jacobini called 911. The intruder turned out to be an employee hired by Jacobini’s bank, JPMorgan Chase, to change her locks, they said. But Jacobini was only three months behind on her payments. And she wasn’t in foreclosure.”

From Amy Goodman At Democracy Now:

Guests:

Matthew Weidner, consumer rights and foreclosure defense attorney and a frequent blogger on foreclosure issues at his website.

AMY GOODMAN: We’re continuing on the issue of foreclosures. Last week a Florida woman named Nancy Jacobini revealed an agent hired by her bank broke into her home after she fell behind on her mortgage payments. Nancy Jacobini of Orange County was inside her home when she heard the intruder. Thinking she was being burglarized, she called 911.

Dispatcher: Do you hear somebody trying to open the front door?

Nancy Jacobini: Yes, yes.

Dispatcher: Ma’am?

Nancy Jacobini: My alarm is going off.

Dispatcher: OK.

Nancy Jacobini: He’s in. He’s in the house.

Dispatcher: He’s in the house?

Nancy Jacobini: Yes.

Dispatcher: So there’s a male outside and inside? Is that—they’ve gotten in.

Nancy Jacobini: I don’t know. I don’t know. I’m locked in my bathroom. I don’t know. I just know somebody is breaking—somebody broke into my house.

AMY GOODMAN: The intruder turned out to be an employee hired by Jacobini’s bank, JPMorgan Chase, to change her locks, they said. But Jacobini was only three months behind on her payments. She wasn’t in foreclosure.

NANCY JACOBINI: I was not in foreclosure. I was not given any warning. I am working in a loan modification, and I actually was perhaps maybe four months, five months behind, at the most.

AMY GOODMAN: That was Nancy Jacobini on MSNBC. Chase has apologized for the incident, but Jacobini has hired an attorney to pursue legal action against the bank. Well, we’re joined now from Tampa, Florida, by Nancy Jacobini’s lawyer Matthew Weidner. He’s a consumer rights and foreclosure defense attorney and a frequent blogger on foreclosure issues at his mattweidnerlaw.com.

Matthew Weidner, welcome to Democracy Now!

MATTHEW WEIDNER: Good morning, and thank you so much for having me.

AMY GOODMAN: This is just shocking. Explain exactly what happened with Nancy Jacobini.

MATTHEW WEIDNER: Look, it’s absolutely terrifying, and I wish this were an isolated incident. But the fact of the matter is, Nancy was sitting on her couch at about 5:30 in the evening, she hears the door being violently kicked and attacked, and she’s absolutely certain that someone is breaking into her home. You can listen to that 911 tape, and you can hear the terror in her voice. But it’s clear, it’s absolutely important to keep in mind, that she is not in foreclosure with this bank, and so she would have no reason to suspect that someone other than a burglar would be breaking into her home. And so, she goes running into the bathroom with her cell phone, she’s dialing 911, and she is just absolutely terrified. And it turns out, after the sheriffs are there, that this individual says that he’s hired by the banks.

Now, what’s so terrifying about this episode is this is not at all unique. I have examples from all around the country where these banks, these jackbooted thugs that are hired by the banks, are kicking down the doors of people’s homes all across the country. The thing to keep in mind, you know, the problems that are existing across this country are not isolated to people in foreclosure. And I think why this particular incident has caught the attention of people across the country is because they recognize that, wait a minute, if this happened to Nancy, then this could happen to me.

AMY GOODMAN: I mean, the story as it’s told is that she was behind in her payments, but she wasn’t even in foreclosure. So, when you’re in foreclosure, this is fine?

MATTHEW WEIDNER: It’s not at all fine ever. But this happens to people in foreclosure. Look, the problem is, they’re doing this when folks are not even in foreclosure. I’ve got examples all across the country where no foreclosure has even been filed. I think we’re going to find examples of people that are in formal modifications with the banks, where they have agreed, because the borrowers are making payments, that nothing at all will happen, but these jackbooted thugs continue with their work. You know, there are examples where people are living in their homes, where they leave for a week or so, where they go on vacation, and these jackbooted thugs are kicking down the doors. And unfortunately, the jackbooted thugs that are representing the banks are emboldened by this.

I confront law enforcement with these issues. Law enforcement, if you can get them to come out to the home, oftentimes won’t take a report of these activities. If they do happen to take a report of the bank’s breaking in and taking property, they will almost always determine that no crime has been committed, and there’s nothing at all that we can do. That really is what’s so disturbing and troubling is that, you know, our law enforcement, that work for us locally, are working now for the banks and saying that what these banks are doing is acceptable. And I’m here to tell you it absolutely is not. I mean, let’s keep in mind that one of the fundamental principles, a core value of this country, has been property ownership. We should have a right to be secure within our castles, within these homes that we own. And unfortunately, this foundation is being shaken by these banks, because they are now just emboldened, kicking down the doors and coming in whenever they please.

AMY GOODMAN: Chase simply said, “We’re sorry”?

MATTHEW WEIDNER: Well, Chase at first wanted to confirm that the power was on in my client’s name. But she’s had power in her name uninterrupted for something like twenty years or so. An irrelevant fact whether power was in her name or not, but the fact of the matter is that sort of a typical response that these banks offer when this happens, if law enforcement calls or if press or someone calls, is, “Well, they’ve abandoned the home,” or, “Well, they’re in foreclosure,” “Well, power isn’t on,” or something such as this. It’s just an excuse. But I think when they offer that excuse to somebody that might question, that leads them off in a different direction. And so, it’s just completely unacceptable.

And what Americans need to start waking up to is the fact that this is occurring with alarming frequency. You know, I’m pleased to appear on Democracy Now!, but I’m going to suggest to you that maybe it’s time we start changing to tell the truth about what’s happening in this country, and the logo might should read “Kleptocracy Now,” because that’s very much what it feels like in this country, a kleptocracy, where those at the top of the pyramid are working feverishly and with amazing efficiency to take from everybody down near the bottom of the pyramid. That’s frightening to me.

AMY GOODMAN: Matthew Weidner, you’re saying she wasn’t in foreclosure, so she wasn’t in any way alerted about this, but they’re saying, because they thought she hadn’t paid her electricity bill, that her electricity was cut off, they thought, which wasn’t true, that that’s why they had sent in an agent to break into her house?

MATTHEW WEIDNER: I believe that’s just an excuse after the fact, but it’s sort of a typical response. Whether she’s got power in her name or not is totally irrelevant. Whether they had filed a foreclosure or not, again, totally irrelevant. The only justification or the only legal right that someone might have to break into your property is when they have an order from a court saying that despite the fact that you own your home, this lender has a right to kick down your door while you’re in there. So, you know, it’s a red herring. They’re throwing out excuses, but they’re doing this in repeated instances.

MATTHEW WEIDNER: Another client, just south of us here in Tampa, a family had left to go take care of an ailing grandparent. The bank had actually been stalking them for months, driving by, taking pictures, making reports of the property. And shortly after they had left for a little bit to go take care of their ailing grandmother, they came home to find their house ransacked, property removed and violated. They felt completely violated by what this bank had done. Again, another case of where they absolutely did not have the right to go in there and destroy and ransack that house. They did so. She’s got very disturbing photographs. And they’re still in that home.

AMY GOODMAN: Debra Fischer, another client?

MATTHEW WEIDNER: Again, I could keep going on and on with stories that are more disturbing than the next. This is a client, again south of us here in Tampa. She had let the house be used by some Canadian tourists. They came down to visit. As they went off to the beach, they came home and found that the house had been broken into, laptops stolen, their personal property stolen. When they called the sheriff’s office, the sheriff’s office came out. They at first refused to investigate. They found a cold beer had been cracked and left on the counter. And the Canadian tourists hadn’t drank that beer. They took fingerprints on it. It turns out that the fingerprints belong to some of the jackbooted thugs that came in and did this. My client had to scream bloody murder in order to get this sheriff’s office to investigate. And when the thugs that came in and did this were interviewed by the sheriff’s department, they admitted that it was part of their practice to go and enter into properties, prying open doors. The Palm Beach Postreported on this story, and the quote that burns me more than anything else was the president of the company that is attributed with these activities is quoted as saying, “We’re not even phased by lawsuits anymore.”

AMY GOODMAN: Let’s go back to Bruce Marks, who’s usually in Boston, has been fighting for a moratorium on foreclosures for years now. He’s with the Neighborhood Assistance Corporation of America, he’s founder and CEO. He’s in Sacramento right now. As you listen to these stories from Matt Weidner, Bruce, what do you hear? What do you—how typical is this?

BRUCE MARKS: Well, you know, Amy, this is very typical. But let’s take a step back for a second. When President Obama was running for president, he said one of the first things he’ll do is put a moratorium on foreclosures. He never did. He never backed bankruptcy reform so people could have the right to go in front of a bankruptcy judge. So, you know, and now, this is not a paper issue. You know, we hear now, “Well, let’s make the process right.” You know, this is symbolic of this industry. When they started, when Wall Street and these banks started making loans, they never took into consideration what people can afford, because there is so much money, billions and billions of dollars, can be made on mass production of these mortgages. And they looked at homeowners as a commodity.

Well, they’ve continued that same practice. Now what they’re doing is, in the foreclosure process, they’re not looking at whether someone can afford to stay in their home. What they’re saying is they’re a commodity. There’s a mass production out there, and they can’t stop that conveyor belt. Well, the fact of the matter, this is not something where they didn’t cross the T’s and dot the I’s. This is something that says this is an industry that is just based on greed.

And where is President Obama? When he says, “Well, you know, we don’t want to upset the market,” what is good about a market when someone is foreclosed on and, you know, next door to people who are making their mortgage payments, you’ve got a vacant building, or you’ve got investor-owned property where there is no consideration of taking the homeowner in to account? So we’ve got to—we have to have a national moratorium to give ourselves a window of opportunity to restructure mortgages, to make them affordable, and have this industry start to look at homeowners as people, as families, as part of the community, not as a commodity to make money. And that’s the problem. And yes, the American people are angry at the government, because—I used to be the regulator. I used to work at the Federal Reserve Bank as a regulator. And we have the authority as regulators to stop these predatory practices.

So, the attorney is absolutely correct. This is not, you know, a one-off.

AMY GOODMAN: Bruce?

BRUCE MARKS: This is, you know—

AMY GOODMAN: Why are you focusing—

BRUCE MARKS:—what the industry is doing across the—yes?

AMY GOODMAN: Bruce, why are you focusing on California right now?

BRUCE MARKS: Well, because, you know, this is our twenty-third Save the Dream event. And, you know, so we were in Los Angeles, now we’re in Sacramento, because it’s devastating out here. But Amy, it’s devastating across the country. And that’s the problem. And this industry has run amok. And, you know, yes, you have these stories, which is—you know, happens all the time, but, you know, the fact of the matter is, it’s devastating here, it’s devastating throughout the country, in Florida and elsewhere. And we’ve been there.

But people can afford a mortgage payment. So isn’t it better to keep an existing homeowner in their properties doing that than really selling it at even less of a price to get rid of it in the foreclosure?

But, Amy, a very important point is not being talked about. The government is the largest foreclosure entity out there. FHA mortgages, government-owned, are doing massive numbers of foreclosures. Fannie Mae, massive numbers of foreclosures. So President Obama maybe doesn’t want to do a full moratorium, but why not make the government-owned entities, the ones that the taxpayers own and control—let’s start with them. Let’s say, “FHA, a moratorium on foreclosures; Fannie Mae, moratorium on foreclosures,” and give us the opportunity to restructure the mortgages. So, in essence, the American taxpayer are foreclosing on ourselves. And people are fed up of bailing out the banks and not helping the homeowners. And we should be able to do this without one dollar of taxpayer money.

JUSTICE ARTHUR SCHACK: Right now, active foreclosures in Brooklyn, which is Kings County, my county, are probably one-quarter of all the civil cases that we have. There are right now 12,000 foreclosures that are somewhere in a—pending, whether it be in early stages or further down the road as the case develops, whereas if we went back four, five years ago, maybe there were probably three or four thousand. So we’re getting buried. […]

If banks do not like what they—what I have done, or anyone else, they have a right to appeal. This is how our system of justice works. I know that in my own county more judges now scrutinize these mortgages than they did before, looking for—looking for any—looking to make sure that everything’s done legally correct. I don’t want to say that we look for defects. We look to make sure that justice is done. So, if the little guy wins, he wins; the bank wins, they win. It isn’t a matter of we’re out to—we’re out with an agenda. Our agenda is justice.

MATTHEW WEIDNER: I wish that he were not atypical. I think that judges run a spectrum. Judge Schack has clearly been way ahead of all of this for many years. We’ve got good judges all across this country who have recognized the problem, but the fact of the matter is that they, too, have been overwhelmed by this crisis.

You know, we talk a lot about this moratorium, and frankly, I find the controversy over the issue of a moratorium a bit perplexing. Let’s talk about the practical consequences. Nothing would happen if we had a moratorium on foreclosures, practically, right now, because the banks can’t sell the properties that they already have title to. So, frankly, one of the problems that I have is that regulators and legislators are a bit late to the game. One of the things I find most disturbing is that it was not legislators or regulators that shut this down; it’s been the industry itself. When they realized what problems they have caused themselves by the faulty paperwork, by all the problems, they’re the ones that have said, “Wait a minute. We’ve got greater liabilities ahead, because of all that we’ve done wrong.” And so, that’s why this is slowing down.

But again, let’s talk about the very real consequences here. And Bruce Marks, I totally agree a hundred percent. One of the questions that we all miss when we’re talking about this is, what’s the point of foreclosure? If we granted every single foreclosure that’s pending right now across this country, what would happen to those homes? We can’t get people qualified to get in homes as it is. So, really, we need to focus on the practical consequences of a moratorium, which would only be to stabilize the market. What we need to be doing is working, like Bruce is doing, to keep people in homes, because the fact of the matter is, that’s far better for these lenders in the long run than tossing people out into the streets.

BRUCE MARKS: Oh, there is a large—there’s a large number. But let’s remember, let’s get to the fundamental issues. The government program has failed to get affordable mortgages. Make the government program work. And Chase is the worst one out there. We’ve got to make an example of Chase to say, “Chase, you’re the predatory servicer out there. Stop your practices.” And President Obama has to stop meeting with Jamie Diamond and Chase executives, so he can make the government program work. He’s got to stand up—

AMY GOODMAN: We’re going to have to leave it there.

BRUCE MARKS:—for working people, not for Wall Street. Thank you.

AMY GOODMAN: Bruce Marks, thanks so much for being with us from Sacramento, founder and CEO of the Neighborhood Assistance Corporation of America.

BRUCE MARKS: Thank you for having me.

AMY GOODMAN: And thank you to Matt Weidner, speaking to us from Tampa PBS station WEDU, foreclosure defense attorney, frequent blogger on foreclosure issues at mattweidnerlaw.com. We’ll link to both of your blog and to NACA, as well

JUAN GONZALEZ: Federal bank and thrift regulatory agencies are holding a series of public hearings in cities across the country this summer to reevaluate the Community Reinvestment Act. The act was passed in 1977 to stop the redlining of low-income neighborhoods and communities on color. Critics have said it contributed to the subprime crisis, but community groups say it was an out-of-date and weak law that could improve bank practices, when used effectively.

Well, a new report from National People’s Action, a Chicago-based coalition of community groups around the country, shows exactly how big banks have been able to wiggle around their obligations under the Community Reinvestment Act. The report is called “Gaming the System,” and it focuses on Wells Fargo, JPMorgan Chase, Citibank and Bank of America.

AMY GOODMAN: And we’re joined by two guests in Chicago, where federal agencies are holding a public hearing today on the act. Liz Ryan Murray is senior policy analyst at National People’s Action and co-author of the report “Gaming the System.” And Reverend Dr. Eugene Barnes from Champaign, Illinois, is president of the board of National People’s Action. He’ll be testifying at today’s hearing.

We welcome you both to Democracy Now! Liz Ryan Murray, let’s start with you. Lay out your major concerns.

LIZ RYAN MURRAY: The major concerns with the way the banks have approached the law is by getting around it. In 1977, as was reported, the law was passed, and when it did, it a covered the entire lending industry, which was, at the time, depository institutions. Since that time, in the last ten, twenty years, rampant deregulation has led to a whole different lending industry, with mortgage companies, brokers, finance companies doing mortgages, and many of them owned by the big banks. Those mortgage companies are not covered by the Community Reinvestment Act and are not under the scrutiny of the law.

In addition, the way the Community Reinvestment Act works, it only looks at certain parts of where a lender is—a bank is doing their business, based on where their branches are. And that’s not where banks are doing their lending anymore. But that’s where the regulators are looking. So the banks have been doing their shadier business around the law, where they’re not being watched. And it’s those loans, those high-cost loans, the predatory lending, that tanked our economy, destroyed our neighborhoods.

If we can get the Community Reinvestment Act back to cover the lending industry the way it was supposed to be covered, it not only has a dampening effect on those kinds of destructive loans, it’s really a major tool for our recovery. It will encourage small business lending. It encourages home lending. It encourages community-led investment. That’s what we need. We need the banks to come in, fix the mess they created through the economic collapse and the mortgage meltdown, and get back to doing the business they’re supposed to be doing in our communities.

JUAN GONZALEZ: Well, I was struck by one part of your report that said that three out of every four, 74 percent, of minority African American or Latino customers of big bank affiliate home lenders received high-cost loans, which averaged 10.2 percent on their first lien mortgages in 2006. How were they able to—these big banks, to so easily target African American and Latino communities for these high-cost loans?

LIZ RYAN MURRAY: Well, African American and Latino neighborhoods and low-income neighborhoods have been the canaries in the coal mine for this disaster, the mortgage disaster. They were the first ones to get the high levels of predatory lending. It’s an easy mark. The lenders went in there, destroyed communities wholesale. They went through churches. They went through community centers. They went through neighbors and convinced people that this was the way to go and that this would be better for them, versus the truly toxic and destructive products that they were.

REV. DR. EUGENE BARNES: Well, we have to go back to redlining to see what redlining was doing. Redlining—banks had targeted certain areas in which they weren’t lending. And then, when predatory lending came about, that targeted population became that same minority Latino communities that they came in and started passing off these toxic loans, which Warren Buffett calls the real weapons of mass destruction. And so, they already had fertile ground, in terms of being able to make these loans. And then, when they saw how the CRA was able to forge a partnership, community partnerships, they already had a toe in, and then business was easy for them. And through the loopholes that—you know, through CRA, they’ve been able to exploit that, and also they’ve been able to destroy our neighborhoods. And so we really need to strengthen CRA. CRA still has milk on its breath, as compared to the voracious, meat-eating appetite of these large financial institutions who have ravaged our communities.

JUAN GONZALEZ: You find many conservative critics saying that it was as a result of things like CRA that we had the subprime crisis. What’s your response to that, Liz Ryan Murray?

LIZ RYAN MURRAY: Well, that’s a fringe opinion that has been shouted down by data, by regulators, by former regulators, Ben Bernanke, the head of OCC, the Federal Reserve, the FDIC. All the data shows that it was about six percent of the lending that was actually covered by CRA was these high-cost predatory loans. CRA was not the problem. It was what was happening outside of the Community Reinvestment Act that was the problem. Those were the loans that took us down. The loans that were done through Community Reinvestment Act performed very well and were, for the most part, the good-quality lending that our communities need, not the destructive credit that destroyed the neighborhood and destroyed our economy.

AMY GOODMAN: Reverend Dr. Eugene Barnes, what needs to be done now?

REV. DR. EUGENE BARNES: We need to get the banks back in the business of lending, extending credit back to the communities that they destroyed; investing in small business, the mom-and-pop organizations, which have been the backbone of the free enterprise system here in America; renegotiate community agreements with the community organizers, such as National People’s Action and many other community groups out there who knows what the issues are and how to address them; to get the banks to continue to invest and live up to the obligation that they have abrogated since they’ve been able to discover the loopholes of CRA. As long as the financial institutions can fly under the radar of CRA, we’ll never be able to get them to get back into the business of lending.

AMY GOODMAN: We’re going to leave it there, and I want to thank you both for being with us. We will certainly link to your report “Gaming the System.” Reverend Dr. Eugene Barnes, president of the board of the National People’s Action, and thank you to Liz Ryan Murray, senior policy analyst there and co-author of “Gaming the System.”

Paul A. Volcker, the former chairman of the Federal Reserve, is trying to preserve the rule he championed on financial reform.

Oldspeak:”The International Banking Cartels are hard at work figuring out ways around laws that haven’t even passed yet and how to maintain business as usual. And with 5 lobbyists for every for every 1 lawmaker on the hill, they’ll probably succeed.”

From Eric Dash & Nelson D. Schwartz @ The New York Times:

As Congress rushes this week to complete the most far-reaching financial reform plan in decades, the banking industry is mounting an 11th-hour end run.

Industry lobbyists — and sympathetic members of Congress — are pushing for provisions to undercut a central pillar of the legislation, known as the Volcker Rule, which would forbid banks from using their own money to make risky wagers on the market and would force them to sell off hedge funds and private equity units.

To secure the support needed for their bill, Senate negotiators are leaning toward creating a series of exemptions to the Volcker Rule that would allow banks to continue to operate these businesses as investment funds that hold only client money, according to several Congressional aides, industry officials and lawyers.

The three main changes under consideration would be a carve-out to exclude asset management and insurance companies outright, an exemption that would allow banks to continue to invest in hedge funds and private equity firms, and a long delay that would give banks up to seven years to enact the changes.

In particular, the provisions, sought by Senator Scott Brown, Republican of Massachusetts, and several other lawmakers, would benefit Boston-based money management giants like Fidelity Investments and State Street Corporation.

But the biggest Wall Street firms would be helped as well. For example, JPMorgan Chase would be able to retain its Highbridge Capital Management unit, and Goldman Sachs could hold on to several large hedge funds, including its flagship Global Alpha franchise. Morgan Stanley could keep FrontPoint Partners and several other smaller hedge funds.

Without the exemptions, all of these banks might be forced to divest the bulk of their hedge fund and private equity units. The fate of these provisions will be the subject of intense negotiations this week, but they have the support of Representative Barney Frank, Democrat of Massachusetts, and Senator Christopher J. Dodd, Democrat of Connecticut, who are leading the effort to resolve the differences between the House and Senate versions of the bill.

Paul A. Volcker, the former chairman of the Federal Reserve and an influential adviser to President Obama, is spending these last crucial days in Washington, trying to safeguard the rule he has championed. Congressional negotiators hope to settle on a final version of the legislation by Thursday, ahead of the Group of 20 summit meeting in Toronto next weekend.

Even if they do not succeed in their efforts to dilute the legislation, Wall Street firms are exploring ways around whatever restrictions become law.

UBS has prepared a 20-page “action plan” outlining various options, while senior managers at Goldman Sachs have had preliminary discussions on eventually dropping its status as a federally insured bank, allowing it to escape several of the most stringent provisions in the new law.

At JPMorgan, the challenge of coping with the fallout from financial reform has figured prominently in weekly strategy sessions convened by Jamie Dimon, the bank’s chief executive.

White-shoe law firms and management consultancies also smell opportunity, with Davis, Polk & Wardwell and Ernst & Young among those offering road maps to navigate the new legislation.

“Wall Street has always been very skilled at getting around rules, and this law will be no exception,” said Frank Partnoy, a professor of law at the University of San Diego and a former trader at Morgan Stanley. “Once you open up the door just a crack, Wall Street shoves the door open and runs right through it.”

Officials of the major banks declined to comment, citing the delicate nature of the discussions.

Even with the legislation still in flux, deals were being made. JPMorgan was moving ahead with plans to buy Gávea Investments, a large Brazilian asset management company, according to a person familiar with the talks. And Citigroup was confident enough to embark on a $3 billion fund-raising effort from outside investors to expand its hedge fund and private equity units.

“With the final outcome and its timing currently unclear, Citi Capital Advisors will continue to provide high-quality asset management and investment opportunities for clients,” said Danielle Romero-Apsilos, a spokeswoman at Citigroup.

Banks will face many new constraints as part of financial reform. For example, they will be required to set aside more capital against possible losses, a problem during the financial crisis.

All major banks will face additional regulatory scrutiny if they are deemed too big to fail and a potential danger to the financial system. Trading in complex derivatives will be shifted out of the shadows and into more transparent clearinghouses and exchanges.

Even with the exemptions being sought, the Volcker Rule will still contain a provision that presents a formidable obstacle to the industry: a restriction on banks’ ability to make speculative bets using their own capital, known as proprietary trading.

Wall Street trading floors are buzzing about creative ways to possibly limit the impact. For example, traders say, it will be tricky for regulators to define what constitutes a proprietary trade as opposed to a reasonable hedge against looming risks. Therefore, banks might still be able to make big bets by simply classifying them differently.

Another idea might be to split the responsibilities of proprietary traders. For part of the day, the traders might put buyers and sellers together in what is known as market-making. But in their spare time, these traders could still use the bank’s capital to make wagers.

“The actual legislation is pretty vague in a lot of important ways,” said Richard Schetman, a financial services lawyer at Cadwalader, Wickersham & Taft.

In Washington, meanwhile, the horse trading over hedge funds and private equity will pick up this week.

To win Mr. Brown’s support and clear the way for Senate approval, Democratic leaders have pledged to support the carve-out for asset managers, according to officials familiar with the talks. But it was never included in the version approved by the Senate, making it a flashpoint between House and Senate negotiators.

Mr. Brown and other lawmakers are also backing the exception that would allow banks to continue to invest a portion of their capital in hedge funds and private equity ventures. Just how much has yet to be decided.

The financial services lobby would like to add yet another exemption — allowing banks to continue to provide start-up capital for hedge funds. (Venture capital investments by banks have already been exempted.)

In addition to being lucrative, the banks argue that “seeding” hedge funds with small amounts of capital does not pose a systemic threat and is something that clients demand. Hedge funds that have been bankrolled by Wall Street firms also worry that they might be forced to liquidate.

If Wall Street is forced to get out of the hedge fund and private equity business, bankers have already mapped out Plan B, not to mention Plans C and D.

Existing management teams may be offered deals to purchase the private equity and hedge fund units they run. The banks could also restructure these businesses, with spinoffs for example, to comply with the new law or even sell them to a larger hedge fund or overseas bank not subject to the Volcker Rule.

If all this were not enough, Wall Street wants to delay the day of reckoning, asking for up to seven years to adapt and avoid a fire sale of assets.

Oldspeak: “”You can use derivatives to get into any business you want,” says Michael Masters, an incredibly successful hedge fund manager who has worked on derivatives reform proposals. “If a bank wants to get into the iron ore business, they can do that. They can get into the coal transportation business. You can say, ‘I’m going to be in the shoe business now,’ and concoct some derivatives based on shoes, and all of a sudden, you come to dominate the shoe industry. Banks are supposed to be banks. They’re supposed to facilitate commercial activity, not directly compete with commercial enterprises. That taxpayer subsidy gives them a leg up on every other industry, financial or otherwise, when they can deploy it on derivatives.”‘

From Zach Carter @ Alter Net:

For the Wall Street reform package currently making its way through Congress to work, it has to accomplish two broad goals: It must take a huge bite out of banking profits and end the too-big-to-fail oligopoly that encourages megabanks to take megarisks and stick taxpayers with the tab. Neither of these goals can be accomplished without taking on derivatives — the wild, unregulated market that brought down AIG. Right now, the U.S. government pays big banks for operating derivatives casinos. If we’re going to clean up the derivatives mess, we have to move taxpayer money out of the market.

“The dirty little secret here is that the American government has been subsidizing the derivatives market through the Fed and other avenues since its inception,” says Adam White, director of research for White Knight Research and Trading. “That’s crazy.”

What kind of business is the American taxpayer subsidizing? One with a history of deception and abuse that dates back to its earliest years. Back in 1993 when derivatives casino was first getting off the ground, a Wall Street titan called Bankers Trust Co. sold a derivatives package to drug and chemical giant Procter & Gamble. At the time, Bankers Trust was a powerful, well-respected financial player, which was how it scored big-time clients like P&G. But P&G ultimately took a huge loss on the deal with Bankers Trust, and took the bank to court, where it obtained more than 6,500 tape recordings of horrific derivatives strategizing.

The public release of those tapes was not enough to compel Congress to actually do anything as a matter of public policy, but it was more than sufficient to utterly ruin Bankers Trust. One quote from the tapes, in particular, has become infamous among the nation’s financial establishment, but remains obscure to the general public. It’s a Bankers Trust salesman, describing the Procter & Gamble deal:

“Funny business you know? Lure people into that calm and then just totally fuck ‘em.”

To this day, such techniques remain a central part of the derivatives business, as the SEC’s recent fraud suit against Goldman Sachs has made clear. These operations are ugly enough as purely private-sector enterprises. But the real disgrace is that ordinary taxpayers are actually helping to fund it. That taxpayer payout, in turn, creates market distortions that encourage fraud, abuse and bailouts.

“In the fall of 2008, when the derivatives market-making of the five big banks lead to a systemic catastrophe, the banks all proudly walked back to the Fed window to get assistance to prop up their derivatives market-making,” says Michael Greenberger, who served as the chief deputy to Commodity Futures Trading Commissioner Brooksley Born during her unsuccessful attempt to rein in the derivatives market in 1998. “The central question is whether we want this to be part of the basic business of derivatives. That seems insane.”

As the Wall Street reform bill moves into its final stage of negotiations, the only proposal still on the table that would actually move taxpayer money out of the derivatives sinkhole comes from the unlikely source of Sen. Blanche Lincoln, D-Ark., a career corporatist who has never shown much interest in regulating anything. But it’s a whopper of a proposal, one that comes free of any loopholes and goes straight to the heart of Wall Street’s bubble machine.

The plan is simple: If you want to be dealing the crazy, complex financial products that toppled AIG, Enron and Long-Term Capital Management, then you can’t receive any funding from the Federal Reserve. No bank can operate without access to the Federal Reserve’s money supply, so the five megabanks would have to choose — do they want to be derivatives houses or do they want to be banks? If they want to be banks, they have to move all of their derivatives operations to an independently capitalized subsidiary — a company that raises money on its own and has no access to taxpayer perks.

While several policymakers close to the financial industry like Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner oppose the Lincoln language — known on Capitol Hill as “Section 716″– many top economists agree that getting taxpayers out of the derivatives business is the most important Wall Street reform still on the table for 2010.

“To me, preserving section 716 is really the critical issue,” Nobel laureate economist Joseph Stiglitz said on a June 9 conference call with reporters. “It protects the taxpayer.” Top economic thinkers like Nouriel Roubini, former IMF chief economist Simon Johnson, Dean Baker and Jane D’Arista have also offered support for the measure.

If banks can’t pump taxpayer money into the derivatives machine, that machine becomes much less profitable. Instead of booking fictitious profits based on perpetual government aid, derivatives dealers will have to price their risks as they exist in the real world. Market forces would shrink the casino, putting the entire economy in a better place.

Most followers of the Wall Street collapse know that derivatives are dangerous — but even some dedicated reformers can find themselves wondering just what the hell a derivative actually is. The answer: just about anything a banker wants it to be. Derivatives are used to for everything from straightforward insurance to outrageous accounting fraud. Any financial contract whose value is derived from some other asset can be classified as a derivative. They can be derived from just about any asset imaginable, which is why derivatives scandals are so diverse in nature. Enron used derivatives to loot the California electricity market. AIG used them to loot the U.S. mortgage market, J.P. Morgan Chase used them to loot Jefferson County, Alabama and Goldman Sachs used them to loot the European Union.

“You can use derivatives to get into any business you want,” says Michael Masters, an incredibly successful hedge fund manager who has worked closely with White on derivatives reform proposals. “If a bank wants to get into the iron ore business, they can do that. They can get into the coal transportation business. You can say, ‘I’m going to be in the shoe business now,’ and concoct some derivatives based on shoes, and all of a sudden, you come to dominate the shoe industry. Banks are supposed to be banks. They’re supposed to facilitate commercial activity, not directly compete with commercial enterprises. That taxpayer subsidy gives them a leg up on every other industry, financial or otherwise, when they can deploy it on derivatives.”

A bloated financial sector is bad for the economy. Instead of acting as a catalyst for broader economic growth, oversized financial sectors actually devour other productive activity. By 2007, finance accounted for about 40 percent of corporate profits, according to the Bureau of Labor Statistics. After taking a dive during the crash of 2008, finance was back to 36 percent of profits by the end of 2009, almost all of that rebound carried by derivatives operations. If we cannot shrink bank profits, our economic recovery is going to be unnecessarily weak. The rest of the economy will be suffering at the expense of our financiers.

But the very fact that most people need to ask the question — what is a derivative? — is part of this market’s profit magic. By injecting needless complexity into otherwise straightforward financial transactions, banks can game their balance sheets, deceive investors and defraud their own clients. The recent examples are nauseating — Goldman Sachs setting up its own customers to fail and then betting against them; Lehman Brothers using derivatives to hide mountains of debt from its own investors; and on and on.

Taxpayers have subsidized banking since the 1930s by providing both deposit insurance from the FDIC and cheap emergency lending from the Fed. There’s a damn good reason for providing this aid: If a bank fails, its depositors don’t lose their savings. This keeps ordinary people from being directly wiped out by a financial crisis, and it also makes financial crises less likely by preventing bank runs.

These guarantees also help banks. Since there is no risk of loss, banks do not have to pay depositors very much to win their money. That makes financing the everyday operations of the bank very cheap, and allows the bank to book bigger profits. So the flip side of that subsidy is regulation. Up until the 1990s, that regulation meant that banks couldn’t do any risky securities trading while receiving taxpayer perks. By 1999, Congress and regulators had ripped away all of those restrictions.

But the explosion of the derivatives market in the 1990s may have been even more significant than the repeal of the Depression-era restrictions on what banks could do. Derivatives did not become a significant part of the banking business until the 1990s. At the end of 1992, at the dawn of the Clinton administration, the total face value of the derivatives market was $12.1 trillion, according to the Government Accountability Office. That sounds like a lot, and it is, but by the end of George W. Bush’s reign in 2008, the derivatives market had exploded to $683 trillion, according to the Bank for International Settlements. In today’s banking industry, just five U.S. banks control nearly $300 trillion of that international market: Goldman Sachs, J.P. Morgan Chase, Citigroup, Bank of America and Morgan Stanley.

This explosion didn’t happen by accident. The surest way to feed a destructive market in anything — finance, oil, junk food, whatever — is to deregulate it, and then subsidize it. Fraudsters love to specialize in products the government doesn’t scrutinize, and everybody likes free money from Uncle Sam. The Bankers Trust scandal was a major event in financial circles, but it didn’t spark a systemic freak-out. But in 1998, one of the world’s largest hedge funds, Long-Term Capital Management, found itself on the brink of collapse after getting in way over its head on derivatives. The scare was so severe that the Federal Reserve orchestrated a bailout for the hedge fund, albeit one financed by the private sector rather than taxpayers. Brooksley Born, already targeting strengthened regulations after the Bankers Trust fiasco, took the Long-Term Capital Management collapse to heart and pushed to rein in derivatives, but was blocked by a coalition of Alan Greenspan, Robert Rubin and Lawrence Summers. In 2000, a Republican Congress passed legislation that further deregulated the market with the blessing of both Clinton and Summers. Suddenly, bankers had carte blanche to do whatever they wanted with derivatives, and get subsidized by the American public.

Derivatives are a fundamentally risky business, much more so than lending. Loans provide a much more direct economic function, their risk is much more easily ascertained, and they can be put to productive uses — buying a home, investing in new inventory, whatever.

“The whole point of government guarantees is to avoid bank runs and establish confidence so that they can lend money out,” says White. “You don’t want to give your money to a bank and have them stick it in the mattress. They’re not lending it out any more. These days, every time they get a dollar from the Fed, they have to make a choice: Are we going to make a loan, are we going to conduct derivatives trades, or are we use it to do proprietary trading. Generally, making a loan is third on that list.”

Even when they are not fraudulent or abusive, derivatives are usually purely speculative instruments. They often do not serve any productive economic function, but instead allow clever opportunists to cash in on some economic event (say, the collapse of the subprime mortgage market). That doesn’t actually help anybody create jobs or bring a great new product into the economy — it just lets somebody get rich at the economy’s expense.

Speculation in small amounts is not an economic disaster. Indeed, some degree of speculation is necessary for a financial system to function at all. But when speculation is subsidized by the government, the rewards offered by raw gambling very easily outweigh the risks. Subsidizing speculators results in way too much speculation in the economy, and puts the economy at large in serious danger.

This is essentially what happened in the subprime mortgage market. As Nomi Prins has detailed, only about $1.4 trillion in subprime mortgages were issued between 2002 and 2008, while about $14 trillion in securitized bets were derived from these mortgages. When the subprime market cratered, the economy’s problem was several trillion dollars larger than it needed to be thanks to derivatives.

The derivatives dealing problem is different from the matter of proprietary trading — banks simply gambling for their own accounts. By dealing derivatives, banks act as a go-between for other speculators. The bank is not betting for its own account, but the taxpayer subsidies for the operation make acting as this go-between much more profitable, and, as a result, speculation throughout the entire financial system becomes cheap and rampant. A strong Volcker Rule — something not yet included in the Wall Street reform package — would end the subsidies for prop trading. But we shouldn’t be subsidizing speculationanywhere, and so long as banks are allowed to deal derivatives, that’s exactly what we’ll be doing.

“They should be seen as complementary,” Stiglitz said. “What is obviously clear is that the current Volcker Rule needs to be strengthened, but even after it’s strengthened…the two are dealing for the most part with different issues, different kinds of activities, different risks, different distortions.”

But there is another still deeper problem in derivatives beyond the subsidization of recklessness, abuse and speculation. By allowing derivatives dealers to operate within the commercial banking system, taxpayers are directly subsidizing too-big-to-fail. Banks deliberately wrap themselves in extremely complex webs of derivatives trades in an effort to insulate themselves from regulatory scrutiny. The current Wall Street reform package tries to end too-big-to-fail by giving regulators new powers to shut down failing financial behemoths. But if banks can still deal derivatives, those powers are likely to prove meaningless. As a subsidized derivatives dealer, a bank can conduct millions of dollars worth of derivatives trades every day, making it impossible for regulators to predict the fallout from shutting the bank down. When push comes to shove, the regulator won’t shut down the bank — it will just bail it out.

“Without OTC derivatives reform enhanced resolution powers for dealing with insolvent institutions could well be rendered impotent and future crises in the credit allocation system will likely be longer and deeper than is necessary,” former Senate Banking Committee economist Robert Johnson told the House Financial Services Committee in November 2009.

Everybody in Washington who has bothered to be educated in derivatives knows that banks use derivatives to make themselves too big to fail, and key politicians have taken direct steps to prevent the public from getting the message. When Johnson testified in November 2009, he was cut off early by Rep. Melissa Bean, D-Ill., and Congress refused to post his testimony online until outrage from the financial blogosphere reached a fever-pitch several weeks later. The House was in the middle of a plan to gut the already timid derivatives reforms offered by the administration of President Barack Obama, and the House ultimately offered an incredibly weak plan to cope with the catastrophe.

But the overarching lesson is clear: you cannot end too-big-to-fail without divorcing taxpayer subsidies for derivatives from the banking industry. Insane profitability carries with it extreme political power. Every other aspect of Wall Street reform hinges on the willingness of Congress to defuse derivatives profits. So long as megabanks can rake it in on derivatives, it will be extremely difficult to rein in other aspects of their business, regardless of what rules are actually on the books.

Fortunately, the political winds are shifting. Kansas City Federal Reserve President Thomas Hoenig offered strong support for the plan to end derivatives subsidies in a June 10 letter to Sen. Blanche Lincoln. Lincoln herself decided to run with the derivatives crackdown when she realized that her primary challenger Bill Halter had both the funding and the support from progressives to unseat her. While Obama remains opposed to the Lincoln proposal, Lincoln’s sudden ferocity on derivatives was championed by both Obama and former President Bill Clinton as reasons for her relevance in the November elections, and this support led Lincoln to a narrow victory in the Democratic primary last week. After watching so-called “moderate” Democrats spend a full year watering down reforms to please their Wall Street backers, at least one Blue Dog finally realized that Americans want real reform, and that real political gain could be realized by providing it.

Organized labor, major boosters of financial reform, poured $10 million into Halter’s campaign against Lincoln. Even though Halter didn’t win, the return on this investment is beginning to look very strong. J.P. Morgan Chase CEO Jamie Dimon expects the current derivatives language to cost his company $2 billion a year in profits. Multiply that figure by the number of major dealer-banks, and it comes to $10 billion a year. Over the course of a decade, $100 billion in Wall Street profits will remain in the real economy instead of being distributed as dividends and bonuses. Scoring $100 billion for the economy on a $10 million investment is a return of 1,000,000 percent — easily the greatest single trade in history.

Our megabanks have used derivatives dealing and proprietary trading to secure big profits and big bonuses in the years since the major financial collapse of 2008. Without the profits from these risky businesses, there is no question that many of the largest U.S. banks would be utterly bankrupt today. Critics of Section 716 say this is reason alone not to support the provision. But think about that — our largest banking institutions are only making money by running speculative casinos (derivatives dealing) and gambling themselves (prop trading). These activities do not support broader economic growth; that’s why the banking sector can be doing so well while the unemployment rate is hovering around 10 percent. Multi-trillion-dollar obscenities don’t do anything to improve the effective or efficient functioning of the economy, especially when they’re converting that economy into the Las Vegas strip. Speculation can’t fuel a financial sector indefinitely– we can’t allow banks to drive themselves off a cliff with speculative operations, bail them out, and then let them go back to speculating like maniacs as if nothing had happened.

Forcing banks out of the derivatives business is by no means a done deal. Only continued public pressure can keep politicians from selling out to Wall Street (again).